U.K. pay rises at fastest pace in more than 6 years

LONDON (Reuters) — British wages grew at their fastest rate in more than six years in the three months to July, adding to signs that a first interest rate hike by the Bank of England is approaching.

Growth in average weekly earnings, not including bonuses, rose by 2.9 per cent in the May-July period, the fastest since the three months to February 2009.

It was only slightly faster than wage growth in the three months to June. But in the month of July alone, wages in the private sector, which are monitored closely by the BoE, grew at their quickest pace since June 2008.

Sterling rose and government bond prices fell as investors took the data as a sign that the BoE remained on course to raise borrowing costs next year, despite concerns about the impact of a slowdown in China and some recent weaker readings of Britain's economy.

"Today's better labour market data will go a long way to reassuring the Monetary Policy Committee that the expansion of the UK economy is on track and spare capacity is small and closing," said Daniel Vernazza, an economist with UniCredit.

Britain's economy has grown strongly over the past two years but the BoE is watching for signs of a further pickup in pay before it starts raising rates for the first time since the financial crisis.

The Office for National Statistics said the unemployment rate held steady from the February-April period at 5.5 per cent, matching a record low since before the financial crisis. It was lower than the 5.6 per cent rate in the three months to June.

Despite a small rise in the number of unemployed people, the numbers suggested Britain's labour market had stabilised after weakening in recent months.

Wages have picked up faster than the BoE expected earlier this year but a long-awaited improvement in productivity could take some of the inflationary heat out of higher pay.

BoE Governor Mark Carney has said a decision about whether to raise interest rates is likely to become clearer around the turn of the year. Carney is due to address British lawmakers on the economic outlook at 1315 GMT on Wednesday.

Including bonuses, average weekly earnings growth accelerated by 2.9 per cent, recovering from a slowdown in the three months to June but lagging the 3.3 per cent growth rate seen in the three months to May.

The growth in pay, while weaker than before the financial crisis, is boosting the spending power of households.

Inflation, as measured by the consumer prices index, fell back to zero percent in August from 0.1 per cent the previous month, the ONS said on Tuesday.

Euro zone inflation was lower than expected in August, revised data showed on Wednesday, raising market expectations that the European Central Bank could step up its government bond buying program called quantitative easing.

The number of people in employment rose by 42,000 in the three months to July to 31.095 million but the number of unemployed people also rose by 10,000 to 1.823 million.

Sam Hill, an economist at RBC, said there were some other less encouraging details in the figures, including a small fall in full-time employment while part-time employment rose.

"This marks a reversal in part-time employment but confirms some fading momentum, signalled by recent PMI surveys (manufacturing in particular), in the scale of employment gains," Hill wrote in an email to clients.

The number of people claiming unemployment benefits, rose by 1,200 after falling by 6,800 in July.